|
|
|
Source: Small Business
Management
Business financial management in the small firm is characterized, in many
different cases, by the need to confront a somewhat different set of problems and
opportunities than those confronted by a large corporation. One immediate and obvious
difference is that a majority of smaller firms do not normally have the opportunity to
publicly sell issues of stocks or bonds in order to raise funds. The owner-manager of a
smaller firm must rely primarily on trade credit, bank financing, lease financing, and
personal equity to finance the business. One, therefore faces a much more severely
restricted set of financing alternatives than those faced by the financial vice president
or treasurer of a large corporation.
On the other hand, when
small business financial management
is concern, many financial problems facing the small firm are very similar to
those of larger corporations. For example, the analysis required for a long-term
investment decision such as the purchase of heavy machinery or the evaluation of lease-buy
alternatives, is essentially the same regardless of the size of the firm. Once the
decision is made, the financing alternatives available to the firm may be radically
different, but the decision process will be generally similar.
One area of particular concern for the smaller business owner lies in the effective
management of working capital. Net working capital is defined as the difference between
current assets and current liabilities and is often thought of as the "circulating
capital" of the business. Lack of control in this crucial area is a primary cause of
business failure in both small and large firms.
The business manager must continually be alert to changes in working capital accounts,
the cause of these changes and the implications of these changes for the financial health
of the company. One convenient and effective method to highlight the key managerial
requirements in this area is to view working capital in terms of its major components:
(1) Cash and Equivalents
This most liquid form of current assets, cash and cash equivalents (usually marketable
securities or short-term certificate of deposit) requires constant supervision. A well
planned and maintained cash budgeting system is essential to answer key questions such as:
Is the cash level adequate to meet current expenses as they come due? What are the timing
relationships between cash inflows and outflows? When will peak cash needs occur? What
will be the magnitude of bank borrowing required to meet any cash shortfalls? When will
this borrowing be necessary and when may repayment be expected?
(2) Accounts Receivable
Almost all businesses are required to extend credit to their customers. Key issues in
this area include: Is the amount of accounts receivable reasonable in relation to sales?
On the average, how rapidly are accounts receivable being collected? Which customers are
"slow payers?" What action should be taken to speed collections where needed?
(3) Inventories
Inventories often make up 50 percent or more of a firm's current assets and therefore,
are deserving of close scrutiny. Key questions which must be considered in this area
include: Is the level of inventory reasonable in relation to sales and the operating
characteristics of the business? How rapidly is inventory turned over in relation to other
companies in the same industry? Is any capital invested in dead or slow moving stock? Are
sales being lost due to inadequate inventory levels? If appropriate, what action should be
taken to increase or decrease inventory?
(4) Accounts Payable and Trade Notes Payable
In a business, trade credit often provides a major source of financing for the firm.
Key issues to investigate in this category include: Is the amount of money owed to
suppliers reasonable in relation to purchases? Is the firm's payment policy such that it
will enhance or detract from the firm's credit rating? If available, are discounts being
taken? What are the timing relationships between payments on accounts payable and
collection on accounts receivable?
(5) Notes Payable
Notes payable to banks or other lenders are a second major source of financing for the
business. Important questions in this class include: What is the amount of bank borrowing
employed? Is this debt amount reasonable in relation to the equity financing of the firm?
When will principal and interest payments fall due? Will funds be available to meet these
payments on time?
(6) Accrued Expenses and Taxes Payable
Accrued expenses and taxes payable represent obligations of the firm as of the date of
balance sheet preparation. Accrued expenses represent such items as salaries payable,
interest payable on bank notes, insurance premiums payable, and similar items. Of primary
concern in this area, particularly with regard to taxes payable, is the magnitude, timing,
and availability of funds for payment. Careful planning is required to insure that these
obligations are met on time.
As a final note, it is important to recognize that although the working capital
accounts above are listed separately, they must also be viewed in total and from the point
of view of their relationship to one another: What is the overall trend in net working
capital? Is this a healthy trend? Which individual accounts are responsible for the trend?
How does the firm's working capital position relate to similar sized firms in the
industry? What can be done to correct the trend, if necessary?
Of course, the questions posed are much easier to ask than to answer and there are few
"general" answers to the issues raised. The guides which follow provide
suggestions, techniques, and guidelines for successful management which, when tempered
with the experience of the individual owner-manager and the unique requirements of the
particular industry, may be expected to enhance one's ability to manage effectively the
financial resources of a business enterprise.
Other Topics of Interest
Looking for cheap cars? Here's how we approached the task of selecting
our winner for the best cheap car online resource
Cheap cars under 1000 for sale. Looking for super cheap airline
tickets? We scanned dozens of sources of cheap flights on the Internet
to come up with our choice
Super cheap flights airline tickets. Apply Ratio Analysis to
Financial Statements to analyze the success, failure, and progress of
your business
Financial ratio analysis formula. So you are looking for a free
business checking account; can you find one? sure!
Best bank for small business checking account free. A business plan
can provide the owner-manager or prospective owner-manager of a small
construction firm with a pathway to profit
Sample construction
business plan company profile. Starting a new small business is the
dream of many people ... starting that business converts your dream into
reality. But there is a gap between your dream and reality that can only
be filled with careful planning
Basics of retail operation
doc, tips on starting small business. Looking for super cheap
airline tickets? We scanned dozens of sources of cheap flights on the
Internet to come up with our choice
Discounted dirt cheap airline tickets, low cost air tickets. We've
reviewed dozens of auto insurance companies, brokers and agents to bring
you this elite list of brands
All car insurance companies, allcarinsurance. The quality of
employees and their development through training and education are major
factors in determining long-term profitability of a small business
Training and
development process, methods for employees. Today, many researchers
are concerned with the information sent by communication that is
independent of and different from verbal information;
What is non verbal
communication nonverbal. Shopping for Auto Insurance - It is now
more important than ever that you shop autoefully for auto insurance
Cheapest sr22 auto insurance listing. Here is an abbreviated example
of a serious sample business plan examples template proposal
Proposal sample
business plan examples free samples. Increasing profits through
reduce costs and cost cutting must be based on the concept of an
organized, planned program
Cost cutting strategies
business, how to reduce expenses. This article discusses get best
bank bad credit mortgages - compare bad credit morgages rates
Accounts that deals with houses and morgages. We've reviewed dozens
of auto insurance companies, brokers and agents to bring you this elite
list of brands with the best free quotes online and very cheap rates
The general car insurance reviews quotes. Looking for cheap
computers? Here's how we approached the task of selecting our winner for
the best cheap computer online resource this year
PC
for sale very cheap computers
Advertising signs for
marketing. Looking for super cheap airline tickets? We scanned
dozens of sources of cheap flights on the Internet to come up with our
choice
Dirt cheap airline tickets very cheap ticket airs. When buying an
air conditioner, ask: How many days a year am I going to use it? How
expensive are my electric-utility rates?
Cost of central air conditioner prices for air conditiong room. New
Ideas for Business, Getting Business New Idea are essential to business
progress Top new idea
invention for business with no money. Wie viel zahlen Sie für
Auto-Versicherung hängt von mehreren Faktoren ab
Kfz billige günstige autoversicherung vergleich. Off-the-rack suits
are getting more expensive, making custom and made-to-order suits
increasingly attractive buys
Cheap low cost men discount suits.
To Small Business Financial Management Top |
Copyright © by
Bizmove.com - Small Business
Management. All rights
reserved |
|
